In C&J Energy Services, Inc. v. City of Miami
General Employees’ and Sanitation Employees’ Retirement
Trust, the Delaware Supreme Court reversed a
ruling from the Chancery Court that had enjoined a shareholder vote
on a merger for 30 days and imposed a mandatory go-shop period
during that period. The Supreme Court's opinion, handed down in
December 2014, revisits Revlon duties thirty years after
the famous decision was rendered, providing important guidance on
the "road map" that a board must follow in
change-of-control situation in order to fulfill fiduciary
duties.

The C&J decision is of interest for boards of
directors of Canadian corporations even though the legal
environment governing change-of-control transactions is somewhat
different north of the border. Indeed, following the BCE
decision by the Supreme Court of Canada, the fiduciary duty of
directors in a change-of-control context is cast broadly as the
duty to act in the best interest of the corporation. In pursuing
this goal, boards must follow a reasonable decision-making process
in accordance with their duty of care. From this perspective,
C&J reminds boards that there "is no single
blueprint that directors must follow" in a change-of-control
transaction, as the Ontario Court of Appeal had also emphasized in
the pre-BCE case of Maple Leaf Foods
Inc. v. Schneider Corp.

Background

After having launched a strategic review, C&J Energy
Services, Ltd. (C&J) entered into a merger agreement with
Nabors Industries, Ltd. (Nabors) and a Bermuda company which was a
subsidiary of Nabors. The merger was structured as a corporate tax
inversion whereby the surviving company would be domiciled in
Bermuda. Following the merger, C&J shareholders would own 47%
of the shares of the surviving company and Nabors shareholders 53%.
The management of C&J would lead the new company.

The merger agreement included a number of governance provisions
in favour of C&J shareholders, including the power to designate
a majority of the initial board, the control of the nominating
committee, the right to receive pro rata consideration in the event
of a sale of the company or major assets, a standstill agreement
and transfer restrictions binding the sale of the shares held by
Nabors. Although the board did not conduct an active market check
prior to entering into the transaction, the merger agreement
included a "fiduciary out" that allowed C&J to
negotiate with third parties under certain circumstances, with a
termination fee equal to 2.27% of the deal value.

C&J shareholders brought a class action before the Delaware
Court of Chancery to enjoin the merger. They asserted that
C&J's board of directors entered into a change-of-control
transaction without properly discharging its fiduciary duties. In a
ruling from the bench, the Court of Chancery found that there had
been a plausible violation of the board's Revlon duties. The
Court enjoined the shareholder vote on the merger for 30 days and
required C&J to shop itself despite the merger agreement's
prohibition on the solicitation of other bids.

Supreme Court decision

The Delaware Supreme Court reversed the Chancery ruling less
than a month after it was issued. The Court's opinion, authored
by Chief Justice Strine, includes a number of important
observations on the duties of directors in change-of-control
transactions. The Court reaffirmed that Revlon requires
boards to seek the highest immediate value reasonably attainable in
a change-of-control transaction. It also restated the Delaware
principle that "there is no single blueprint that a board must
follow to fulfill its duties". When reviewing the course of
action taken by the board of directors, a court will look at
"whether the directors made a reasonable decision,
not a perfect decision".

The Supreme Court emphasized that the Delaware case law allows a
board of directors to pursue the transaction that it considers to
be the most valuable to shareholders "so long as the
transaction is subject to an effective market check". Most
notably, the Court remarked that the market check does not have to
involve an active solicitation. A market check is effective if
"interested bidders have a fair opportunity to present a
higher-value alternative, and ... the board has the flexibility to
eschew the original transaction and accept the higher-value
deal". In this case, the Court found that there were no
material barriers preventing a rival bidder from making a superior
offer during the five month period following the announcement of
the transaction. Moreover, the merger agreement provided for a
fiduciary out which was accompanied by a termination fee that was
qualified as "modest" by the Court.

Finally, the Supreme Court found that the C&J board had had
no improper motive to sign a deal with Nabors. Notably, the Court
did not consider that the efforts of C&J's CEO to secure an
employment package as CEO of the new entity tainted the negotiation
process. Further, the Supreme Court held that the board was
well-informed about C&J's value, as were the shareholders
who had the opportunity to vote on the merger.

Admittedly, the Supreme Court was called upon to issue its
ruling in a rather unique setting. The appeal was filed without a
formal opinion from the Court of Chancery and therefore without any
detailed findings of fact. The Supreme Court was therefore required
to craft its own factual recitation in the first instance as to
most aspects of the process. In addition, the C&J transaction
involved an unusual corporate tax inversion. Despite these unusual
circumstances, however, the Supreme Court's discussion of
Revlon duties in C&J is relevant to
change-of-control transactions.

As a construction company that actively bids and works on larger infrastructure projects, you will likely be required to provide a signed certification in response to future Requests for Qualifications.

On November 14, 2016, the Securities and Exchange Commission ("SEC") announced an award of more than $20 million to a whistleblower who promptly provided the regulator with valuable information that allowed the SEC to commence an enforcement action against the wrongdoers before they could squander the money.

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